1. Field of the Invention
The present invention relates generally to the field of electronic trading systems and, more particularly, a system and method for tracking SWAP derivatives transaction positions and monitoring.
2. Description of the Related Art
A derivative is a financial contract whose value is based on, or “derived” from, a traditional security (such as a stock or bond), an asset (such as a commodity), or a market index. A SWAP agreement is a type of derivative transaction where two streams of cash flows are exchanged. SWAP's are inherently synthetic securities—they are created and/or terminated at the behest of the counterparties involved in the transaction. These transactions have stated durations for which they can ultimately last, but they can be cancelled at anytime upon mutual agreement by the counterparties. These cancellations can happen in a tear-up, where the original counterparties agree to end the contract for some economic terms. The transactions can also be exited by the one counterparty as part of an assignment. An assignment is a mutual agreement among the original counterparties to allow one original counterparty to exit the transaction while assigning another new counterparty its obligation. Two major markets for derivatives are interest rate swaps and credit default swaps, although others exist.
Derivatives transactions have traditionally been executed over the telephone through conversations between traders for the respective counterparts. More recently, electronic messaging systems and electronic trading systems have been developed to facilitate the execution of derivatives transactions. In addition, there has been a significant increase in the number and volume of SWAP transactions over the past few years. Because of such increase in trading volume and the fact that SWAP transactions may occur in different venues (e.g., over the phone or on an electronic trading platform), it has become increasingly difficult for market counterparties (e.g., customers and dealers) to monitor outstanding SWAP transactions, including tear-ups and assignments.
Indeed one of the most common problems with respect to monitoring SWAP transactions relates to tear-up/assignment situations. In the dealer-to-customer market when an outstanding SWAP is assigned by a customer to another dealer or offered back to the dealer that is the counterparty to the SWAPs transaction, the counterparts may be unaware at the time of execution and for several days, sometimes weeks after such execution, that the parties' respective positions have been unwound or assigned. For example, if Customer A terminates its position with Dealer A by assigning the derivative contract to Dealer B, it may take several days for Dealer A to become aware that it no longer has a position with Customer A. If Customer A tries to enter into a new derivatives transaction with Dealer A during the period of time after the assignment is effected by Customer A with the new dealer but prior to the time Dealer A is notified of the assignment, Dealer A may deny the transaction (for credit reasons, for example) based on a position that no longer exists. Customer A may seek to complete the new deal with another dealer, and Dealer A would have lost the opportunity to do the deal and potentially earn additional income.
Another common problem with respect to monitoring SWAP transactions relates to monitoring credit levels with customers. Parties trading derivatives transactions generally set credit levels with one another based on the parties' credit worthiness and current positions with one another. The lack of a system for updating positions substantially on a real-time basis also has implications for the administration and monitoring the parties' credit positions. For example, a dealer may execute several derivatives trades with a customer throughout the trading day. Because different traders at different times may execute the trades, a dealer is prone to making errors in determining whether the customer has reached its credit limit. On the one hand, if a dealer mistakenly permits a customer to trade over its credit limit, the dealer will be increasing its exposure significantly. On the other hand, if a dealer mistakenly believes that a customer has reached its credit limit because it is unaware that some transactions have been unwound or assigned away, the dealer may lose the opportunity to trade with the customer and potentially earn additional income.
As such, there is a long felt, but unresolved in the art for a system and method that both facilitates the unwinding and assignment of derivatives positions, but also allows counterparts to monitor such positions substantially in real time. Moreover, there is a need for a system and method that permits counterparts to monitor its credit position with customers in real time.